From the studio

Video: CIO's Eva Lee gives a flash update on China stimulus and stocks (2:56)

Thought of the day

The release later today of US inflation data for September will give investors further guidance on the likely next step for the Federal Reserve. Expectations over the pace of rate cuts have been shifting in recent weeks. Stronger-than-expected employment data has caused markets to scale back the chances that the Fed will repeat the bold 50-basis-point cut enacted at its September meeting. The latest CME FedWatch data now shows a 0% probability of such a large move, down from over 35% just a week ago. Indeed, markets are now implying a 15% chance that there is no cut at all at the upcoming policy meeting, up from 0% a week ago.

But whether the Fed decides to reduce rates at a faster or more gradual pace, the direction of travel remains unchanged, in our view.

Inflation should stay under control. Markets are likely to focus on shelter costs again following August’s faster-than-expected CPI data due to owners’ equivalent rent. But with data on actual rents pointing to just modest increases over the past 18 months, we maintain the view that inflation is unlikely to stand in the way of further Fed rate cuts. Last week’s personal consumption expenditure data for August, the Fed’s preferred measure of price pressures, showed annual inflation slowing to the lowest level since February 2021.

Fed minutes suggest more cuts ahead. In discussing the outlook for monetary policy, Fed officials anticipated a “move toward a more neutral stance of policy over time” if economic data continues to come in about as expected, according to the minutes released Wednesday. While policymakers may not see the urgency to move as quickly as they did in September, as some “would have preferred a 25-basis-point reduction,” they acknowledged the restrictiveness of monetary policy. In addition, the minutes noted that the overall path of policy normalization would be more important in determining the degree of policy restriction, rather than the specific amount of easing.

Fed officials indicate a bias for additional cuts. Fed officials continue to stress the importance of economic data in their considerations, but they have also supported further rate cuts even after the strong payrolls report. Governor Adriana Kugler said she would consider further reductions if inflation continues to ease as she expects, Boston Fed President Susan Collins said further adjustments of policy will likely be needed, and St. Louis Fed President Alberto Musalem said he supports more cuts as the economy moves forward on a healthy path. Dallas Fed President Lorie Logan highlighted “still real” upside risks to inflation and “meaningful uncertainties” over the economic outlook, but said she supports a more gradual path back to a normal policy stance.

So, we continue to recommend investors position for a lower-rate environment, deploying excess cash, money-market holdings, and expiring fixed-term deposits into assets that can offer more durable income. These would include bond ladders, medium-duration investment grade bonds, diversified fixed income strategies, and equity income strategies. We also believe lower rates make a favorable backdrop for equities, and favor AI beneficiaries and quality stocks.